Blog
- April 8, 2024
Types of contributions
Charitable contributions are a great way to disperse your funds and, at the same time, can help reduce your tax liability. Contributions typically fall into three primary categories: cash, services, or property.
In this blog, we will take a look at each of these contributions and how they impact your taxes.
Cash Contributions
Cash contributions are often considered one of the simplest forms of charity. But it’s important to keep in mind how they are taxed. If you are donating less than $250, then it’s mandatory to keep a bank record or receipt. This receipt should have the charity’s name, gift date, and amount. It can be anything like a bank statement, canceled cheque, or some form of acknowledgment from the charity.
If you donate more than $250, you must have a written acknowledgment from the charity. In this acknowledgment, the charity must include all the basic information required for general contribution. However, the charity must mention whether the organization provided any goods or services in return for the donation. This is the most important part, as any such goods or service’s value must be deducted from the donation amount claimed on your tax return. Let’s say you donate $250 and receive a concert ticket valued at $50. So, your deductible contribution is $200. One more important step is to treat each donation separately. For e.g., you cannot fuse multiple donations to meet the $250 threshold for written acknowledgment.
Services Contributions
When it comes to services contribution, the IRS draws a clear line regarding contributions of services: you cannot deduct the value of your time. This includes professional services such as legal advice, medical treatment, or contracting work. But you can surely deduct any out-of-pocket expenses you had to incur when you were providing these services.
Let’s say you volunteer at a local shelter and purchase supplies for a project. You can deduct those costs. Similarly, if you use your car for charity work, you can deduct mileage (of course, using the standard mileage rate for charity work determined by the IRS), parking fees, and tolls. You’ll have to keep these receipts and a log of your expenses while claiming these deductions. Without these details, you might have to face legal troubles in case of any IRS inquiry.
Property Contributions
Property contribution is another common form of contribution. Here, the recordkeeping requirements vary significantly based on the value of the contribution. For items under $250, you’ll have to stick to your routine contribution, i.e., obtain a receipt from the charity with their name and address, the date of the contribution, and a detailed description of the item. One more thing that our experts advise in case of property contributions is to keep the photos of the property. While this is not mandatory as per IRS laws, the photos indicate the condition of the property when you donated it. This is a good practice as it can influence the fair market value (FMV).
Now if the donation is worth between $250 and $500, secure a written acknowledgment is necessary. This must include all the above information plus whether the charity gave you anything in return. You should get this document before you file your return or on the due date of the return.
If your donations are valued above $500 and up to $5,000, you will have to fill out Section A of Form 8283 and attach it to your tax return. You’ll need to provide the charity’s acknowledgment, a detailed description of the donated item, how you determined its FMV, and how and when you acquired the property (purchase, gift, inheritance, etc.).
When you are donating property valued over $5,000, you must obtain an independent appraisal and complete Section B of Form 8283 in addition to the acknowledgment. The appraiser must sign the form, and you must retain a copy of the appraisal for your records. For donations exceeding $500,000, the qualified appraisal must be attached to your tax return.
Remember, every contribution needs thorough documentation. This must include the written acknowledgment, the acquisition cost, any improvements made, the method used to determine the FMV and statements regarding whether the property will be used by the charity or sold. The IRS is particularly stringent on these donations because they are susceptible to overvaluation.
Special Considerations for Certain Properties
There are various rules for specific property types. For instance, cryptocurrency is considered property for tax purposes but isn’t treated as publicly traded stock. Let’s take a look at these considerations:
Tangible Personal Property
If you donate tangible items like art, collectibles, or equipment, your deduction depends on the charity’s use of the item. If the charity uses the item in a way related to its mission, you can typically deduct the item’s full fair market value. However, if the charity sells the item or uses it unrelatedly, your deduction may be limited to the item’s cost basis, typically what you paid for it.
Cryptocurrency
Cryptocurrency donations, such as Bitcoin or Ethereum, are classified as property donations for tax purposes. Unlike publicly traded stocks, you can’t deduct the market value if you’ve held the crypto for less than a year. For cryptocurrency donations held for over a year, you can generally deduct the fair market value at the time of the donation.
Future Interests
Certain future interests, like charitable remainder trusts, allow you to donate property while retaining some benefit, such as an income stream. You can usually take a partial deduction in the year you set up the trust based on the present value of the remainder interest that the charity will eventually receive.
Charitable Contribution Deduction Limitations
Now, the charitable contribution deductions have some limitations and caps. Here are they:
- Adjusted Gross Income Limits: The amount you can deduct based on your adjusted gross income (AGI) is limited. You can deduct up to 60% of your AGI for cash contributions to public charities, but the limit is 30% for gifts of appreciated property. These limits can be lowered for donations to certain organizations, like private foundations.
- Carryover Provisions: If your donations exceed AGI limitations, you may carry over the excess for up to five subsequent tax years, subject to the same percentage limitations in those years.
- Itemized Deductions: You must itemize deductions on your tax return instead of taking the standard deduction to benefit from charitable deductions. This is an important consideration, as itemizing only makes sense if all your itemized deductions exceed the standard deduction for your filing status.
- Qualified Organizations: Only donations to qualified organizations are deductible. Contributions to individuals, political organizations, or political candidates are not deductible.
- FMV Adjustments: If you own property that has increased in value, you may need to adjust its fair market value (FMV) if you haven't held it long enough or if it's of a type that does not qualify for a full FMV deduction, such as tangible personal property not used by the charity in its operations.
Case Study: Contributing Stock vs. Sales Proceeds
Let’s take the example of Jeanne, who wishes to donate $4,000 to a charity. She can sell her publicly traded stock valued at $4,000 (with a basis of $1,000) or donate the stock directly. If she sells the stock first, she incurs a $600 capital gains tax (at 20%) and will need to add $600 of her cash to make the full $4,000 donation. By donating the stock directly, she avoids the capital gains tax, making the full $4,000 donation more tax-efficient.
Recordkeeping is Critical
Maintain meticulous records for all contributions. This includes the amount and nature of the donation, the organization’s name, and the contribution date. For property donations, record the FMV, basis, and valuation method.
Wrapping Up
Charitable giving is a noble endeavor and a potentially advantageous tax strategy. By understanding the nuances of each type of contribution, taxpayers can optimize their philanthropic impact while ensuring compliance with IRS regulations. Always remember to keep comprehensive records and consult with a tax adviser. Understanding the ins and outs of charitable deductions can get complicated. So, it’s best to talk with the professionals for clarity and peace of mind. Reach out to CROWNGLOBE for expert advice on your donations.
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